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The cost of failure

When business travel plans go awry, the impact is substantial. That’s according to research conducted by the Global Business Travel Association.

A delayed or cancelled flight, by far the most common issue, affects 87% of business travelers each year. And the impact is significant, causing lost hours. missed meetings, incremental costs to re-arrange … In fact, the survey suggests the average cost is $1457, plus missed work hours.

The reason I find this interesting is because disrupted travel is essentially similar to a disrupted contract. We thought we had a commitment, we planned on it being executed … and the commitment was not honored. Assessing the cost impact in this way is relatively rare. Also, as the survey points out, if travel managers understand the relative frequency of different types of disruption, they can better plan for them and reduce either the likelihood or the consequences that arise.

Essentially, this is just another example of the importance of contract managers assessing impact and monitoring overall frequency so that they can drive improvements for their business, both as a buyer and a seller.

Commercial competence

Tesco, a major retailer, becomes the latest in a growing line of private sector companies that appear unable to properly manage their contracts. In this case, there is a black hole of more than $400m from over-stated revenues, apparently stemming from commercial agreements with suppliers. Essentially, I presume, Tesco has counted forward revenue (rebates) and applied it in the wrong accounting period, in order to boost results.

The Chairman dismisses the incident with the words ‘Things are always unnoticed until they are noticed” – an obvious truism, but scarcely an effective response. Today, regulatory authorities, shareholders and society rightly expect more. In this era of automation and ‘big data’, top management should have better insights to what is going on, especially in the performance of contracts.

And it is in the area of contracts and external trading relationships that most of these commercial issues seem to occur. Whether it was the financial crisis, the repetitive issues over bribery and corruption, the scandals of overcharging or the inability to properly count revenue, weaknesses in overall contract oversight are a common theme.

No wonder, then, when we talk about the growing need for commercial competence, we see a direct link to the quality of contract management – both within individual deals and across the contract portfolio. But executive action in addressing weaknesses in contract management are woefully slow. Levels of automation lag well behind other functions. The role is still seen largely as administrative, rather than analytical. And until this changes, situations like that at Tesco are bound to be repeated.

Acquiring skills: first recognise what you need

According to Workforce magazine, “It’s easy to recognize a vacant position in your company, but it’s much harder to identify the skills a potential employee will need to fill that void. The inability to match qualified people to vacancies is costing companies billions of dollars in lost revenue.”

When it comes to contract and commercial management, this statement certainly appears true. We know that weaknesses in these areas are indeed costing billions of dollars a year. We know that the market for suitably qualified staff, already tight, has become almost impossible as demand levels grow. We know that the sources of new recruits are very limited – this is not a traditional career path and there is virtually no graduate-level recruitment or training.

There is every sign that demand for contracts and commercial staff will continue to grow at a rapid rate, especially now that Government and companies have awoken to the need for these skills to supplement (or in some cases absorb) traditional procurement activities. Unfortunately there is no quick fix that will suddenly generate large numbers of suitably experienced candidates. Therefore the point made in my opening sentence is crucial – the importance of ‘identifying the skills a potential employee will need’.

At IACCM, we have a well-established skills profile for people filling a contracts or commercial role. It is used as part of our professional certification program. But given the shortages of supply and the relative immaturity of defining the contracts / commercial job role, we know very well that organizations must be open-minded in their recruitment or development of contract and commercial staff. This means that they must be ready to use skills assessments as part of their recruitment process (several major corporations already use the IACCM skills profile). It is an approach that enables them to look beyond established practitioners and potentially identify people from other – often related – job roles who can successfully make the switch.

Some organizations consider that the best way to tackle their needs for improved contracting may not be through recruiting specialist contract / commercial managers, but instead by raising competence levels in other functions. Once again, the smart way to do this is by first assessing current skill levels, thereby identifying the people best suited to an enhanced role and also identifying major gaps in proficiency.

Either way, whether recruiting new staff or improving the capability of an existing workforce, it is essential to have clarity over the skills required and a robust method to assess and test the personnel who will ‘fill the void’.

The role and purpose of contract management

This week I have focused on the findings of the UK National Audit Office in its investigations on the state of contract and commercial management.

Few of its observations will come as a surprise to practitioners in this field. Indeed, it reflects many of their pent-up frustrations in the misalignment of contracting discipline with business value. The relegation of contract management to a subordinate and largely administrative / quasi-legal role has significant cost and revenue implications, as revealed by many IACCM research reports.

The NAO describes these issues in the following way:

Government fails to recognise the value of contract management. The purpose of contract management is to use commercial mechanisms to improve services and reduce costs. Too often contract management has been seen as delivering the deal that was agreed when the contract was signed. This has meant that contract management has been seen as a way to avoid things going wrong, rather than unlocking value.

Government needs to recognise that value is achieved over the life of the contract. This means designing policies it has the capability to deliver, planning for the contract management stage earlier, and paying it more attention.

Senior managers in central government departments have not taken contract management seriously. Central government has yet to adapt to the commissioning role it aspires to. Departments have not adapted governance to the expanding role of government contracting: they have lacked the basic infrastructure of oversight, senior engagement, challenge and scrutiny. Systems of governance have focused on approving new projects, as if government’s responsibility ends when the contract is signed.

Senior managers have not demanded visibility over their contracts. Senior managers have not always acted as if they recognised that departments are responsible and carry the risk for the services they have contracted. Managers have rarely demanded combined portfolio information to scrutinise and challenge operational contracts. Senior managers have often only engaged on contracting issues to firefight problems. As a result, they have put little pressure on teams to improve the information they rely on to manage the contract.”

The highlighting is mine. I challenge private sector organizations to demonstrate that these same weaknesses do not largely apply within their operations. The truth is that contract and commercial management are typically weak and often ignored as disciplines. As the National Audit Office points out, it is time to change.

A distinct and respected specialism

“The root cause of the weaknesses in contract management is failure over many years to establish contract management as a distinct and respected specialism with a strong ethos and well-defined responsibilities. Our accompanying report confirms this to be the position across government. Contract management roles have carried lower status and profile than posts on major policy development or projects, and in procurement teams. We consider this a dangerous position for outsourced services.”

This is another extract from the recent report by the UK National Audit Office on Government contracting. The comment could equally be made of most private sector companies.

Many may look at this statement and ask ‘so what?’ They would challenge the idea that ‘weaknesses in contract management’ are dangerous. ‘Show me the evidence’, they demand. And of course, historically they have been safe because the weaknesses ensure there is no data and the lack of data ensures the weaknesses continue.

But the world is waking up. Driven by the work undertaken by IACCM, there is growing realization that poor contract management carries a heavy economic cost. This may be due to lost revenues, lost savings or cost overruns – and cumulatively, it represents a lot of money. Austerity programs seem to be creating Government interest and awareness of this potential far faster than in most commercial sector organizations.

It is frustrating now that we have the data that action is not occurring faster. But it comes back to this issue of weakness and the consequent skills. Low status groups do not attract powerful or strategic leaders. Therefore we lack any bottom-up drive for executive awareness. Many of today’s contract management groups are embedded in other functions that have little interest in raising the profile of this activity or of the people who perform it. They lack the motivation, the budget or the remit.

So progress is slow, but it is happening. And reports like this from the NAO will certainly accelerate that interest.

For me, the big point is contained elsewhere in the NAO report and that is distinguishing contract management as a practice and function from contract management as a capability or competence. Many people are involved in performing a contract management role; relatively few need to be practitioners. My interest – and indeed the interest of IACCM – is in assisting organizations to define and implement that overall capability and competence. This is about far more than simply training a few people to be contract managers; it is about creating a leadership team accountable for ensuring the economic results that good contracting can deliver.

Are you addressing problems with contract management?

Last week, the UK’s National Audit Office provided Parliament with its latest reports on Contract Management. They are encouraging, in that they reflect the robust focus that government is placing on this discipline. At the same time, they reveal the depth of the challenge in driving improvement.

Such is the depth of these reports that I will cover them in several blogs this week; we will also shortly be interviewing the author of the reports on a webinar. It is interesting that a number of Governments are now committing significant resources to improving their contracting capabilities. IACCM is working closely with them. Indeed, it seems to me that the public sector is actually starting to out-strip most private sector companies in its grasp of the importance of contract management in today’s business environment. I often have to smile when I hear from our public sector members about the assurances they have had from senior private sector executives about their commercial skills and processes.

IACCM’s Capability Maturity Assessments are increasingly used by the private sector to review their contracting processes – and for many, the issues highlighted by the NAO ring true. Therefore I am going to start these reports with the listing of weaknesses that the audit office uncovered when it tested 73 contracts from UK ministries.

Problems with contract management

The reviews found widespread problems with how government manages its service contracts. As well as testing for overbilling, 73 contracts were tested against the 8 areas of the NAO’s 2008 good practice framework for contract management. Issues were found on all 8 areas, for example:

Planning and governance (issues on 38 out of 73 contracts tested)

Departments lack visibility of contract management at board level and lacked senior-level involvement.

People (40 issues)

Government does not have the right people in the right place for contract management. There were gaps between the numbers and capability of staff allocated to contract management and the level actually required.

Administration (39 issues)

Contract management is not operating as a multi-disciplinary function. There was often limited interaction between finance, commercial and operational contract management functions.

Payment and incentives (48 issues)

Government is not fully using commercial incentives to improve public services. Levels of payment deductions allowed by contracts are often insufficient to incentivise performance. Open-book clauses were rarely used.

Managing performance (50 issues)

Contractual performance indicators are often weak and government is too reliant on data supplied by contractors.

Risk (47 issues)

Government does not have sufficient understanding of the level of risk it is retaining on contracted-out services. None of those in the cross-government review shared risk registers with the contractors to ensure all understood who was managing what.

Contract development (50 issues)

Departments are paying insufficient attention to the impact of contract change. For example, departments made changes at operational level in isolation from other service areas. Systems for maintaining up-to-date versions of contracts remain weak.

Managing relationships (31 issues)

Not all departments have had a strategic approach to managing supplier relationships. Senior management engagement with suppliers has not been widespread across government. A lack of meaningful incentives for innovation  can inhibit shared approaches to problem solving and mutual improvement.

Do these same issues impact you?

I wonder how many of us can say that similar weaknesses do not apply in our organization, or in our suppliers or customers? At least Government is awakening to the issues – and the very real financial consequences that come from failure to address them. In the private sector, while some have made real investments in developing their contract and commercial capabilities, I fear that many executives have not even awoken to the need.

The end of sales as we know it

On Successful Workplace, Chad Garrett writes about ‘the death of the enterprise salesman’. He describes the growing sophistication of customers, who undertake far more independent research and no longer rely on the sales interface for information or requirement development.

On this blog, I write extensively about change and in particular how it is impacting the way trading relationships are formed and managed. I agree with Chad’s observations – in fact, I would go further. The pressure from regulators is forcing a new era of honesty and transparency, driving the need for far greater integrity and openness throughout the sales process.

As with all periods of transition, there are teething problems. First, while customers are trying to improve the skills of their teams in researching the market, it is clear that areas such as requirement definition and documenting specifications / scope are still problematic. The frequency of a mismatch between a customer’s perceived needs and a supplier’s capabilities seems to be increasing. Also, this new environment means that many contracts are based on ‘customized ‘wants’ rather than ‘market needs'; that undercuts supplier economies of scale and increases the risk of failure.

As the blog points out, this evolution alters the skill set needed for both promotion to and interaction with the market. The role of holistic opportunity assessment and alignment with capability becomes even more critical and the cycle time for doing it is shorter. Meantime, squeezed by current role and measurement system, sales staff become more desperate to win and the likelihood of poor assessment or over-commitment increases …

Overall, this is just one more perspective that adds to the pressing need for improved commercial judgment and the importance of more disciplined ‘commercial assurance’. Inserting this capability at a much earlier phase of opportunity management will be critical to future success.

I  don’t know whether future marketing staff will have enhanced commercial and contract skills, or commercial and contract staff will have enhanced sales and marketing skills. But I am sure that greater integration of these competencies will be a feature of the rapidly changing market.


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